Inventory management is important for retail businesses involved with the sale of finished goods and products as well as for manufacturing businesses that produce finished goods, products and/or components for use in other goods and products. Stated otherwise, goods and material availability, having the proper amount of finished goods, products, components and/or raw materials, is critical to the success of a business. For instance, if a retail business selling finished goods has an insufficient on-hand inventory, sales may be lost when customers go elsewhere to purchase the unavailable goods. This may also erode the customer base of the business. Alternatively, maintaining an excess of on-hand inventory may increase costs for the business. Costs associated with excess inventory may include, without limitation maintenance costs, storage costs, spoilage costs, damage costs, the waste of assets such as cash, the excess expense of interest, and/or depreciation of the value of the inventory. In any case, excessive inventory generally ties up capital that may be more effectively utilized elsewhere. Manufacturing businesses face many of the same challenges. In this regard, a manufacturer may require a plurality of manufacturing parts/components for use in producing a good. An insufficient on-hand inventory of any such components may result in delayed production, delayed delivery and, ultimately low customer satisfaction. As with retail businesses, manufacturing businesses also must balance the need for on-hand inventory with the costs of carrying excessive inventory.
Generally, this balance includes an analysis of the amount of on-hand inventory a business will carry versus a percentage of time when they desire to have the goods/components available. Complicating this analysis is the variable nature of demand and/or usage of goods/components including, without limitation, consumer demand, product sales growth/decline, the unpredictability of supply lead-time for re-ordering goods/components, and the unpredictability of the quality of the goods/components, etc. To attempt to address these and other concerns, a number of “lean flow” inventory management systems have been implemented. While such inventory management systems typically utilize different re-order points and replenishment quantities, these systems generally attempt to reduce inventory carrying costs. Such systems include fixed-rate supply systems (where replenishment inventory is supplied at a fixed rate) and make-to-order systems (where products are only manufactured after they are ordered).
Another management system is a “just-in-time” production/stocking system often referred to as Kanban. Generally, in the Kanban system, a small on-hand inventory is maintained and this on-hand inventory is replenished as it is depleted. Upon depletion of a good/component to a predetermined level, the Kanban inventory control system authorizes production or movement of replacement goods/components. Historically, Kanban was a card or signboard that was attached to specific parts in a production line. These cards and signboards signify the need for replenishment of a given quantity of the specific part. The authorized replenishment quantity is preferably minimized to reduce carrying costs. The replenishment quantity for a specific part or item is determined in part by the demand rate for the item and the time required producing or acquiring more of the items. The replenishment quantity generally is established and remains unchanged unless demand or other circumstances are altered dramatically; in this way inventory is kept under control while production is forced to keep pace with shipment volume. While originally a card system used in Japan, Kanban systems now include empty containers, empty spaces and even electronic messages to signal the need for replenishment of depleted items.
When implemented, the Kanban system operates according to the following rule: all production and movement of parts and material takes place only as required by a downstream operation, i.e., all manufacturing and procurement are ultimately driven by the requirements of final assembly or equivalent (e.g., sales). The Kanban system has been adapted to have various formats and content as appropriate for usage with different businesses. For example, a Kanban system for a retail business is different than a Kanban system for a manufacturing business. Regardless, any Kanban system incorporates a method for signaling suppliers or upstream production operations when it is time to replenish depleted stocks of goods, components or subassemblies based on consumption.
While simple in concept, the variable nature of business sales and/or production makes determining when and how many replenishment items should be ordered a difficult problem. Ideally, the time and quantity of the replenishment order should allow the on-hand inventory and hence inventory investment to be minimized while ensuring adequate supplies for nearly uninterrupted manufacturing operations and/or sales.